Gold, silver, pgms, mining and geopolitical comment and news

Metals Focus

I recently attended Metals Focus’ launch of its latest publication on Precious Metals Investment and while its overall conclusions were somewhat mainstream the group’s analysts are looking for the gold price to AVERAGE US$1,400 next year which suggests at times spot prices will go higher than this. I published an article on this on the Sharps Pixley website on this which is set out below:

Metals Focus still sees gold hitting $1,400 average in 2018

Yesterday saw the launch of London-based precious metals consultancy Metals Focus’ second annual Precious Metals Investment Focus publication which, in its 90+ pages, goes into considerable detail on the current prospects for gold, silver, platinum and palladium. The consultancy also yesterday published its latest Precious Metals Weekly newsletter, which emphasised some of the findings of the longer report and, perhaps, what it sees as the potentialimpact of the increased likelihood of a U.S. Fed small interest rate rise at its December meeting. However some others – notably Jim Rickards in a recent interview – would disagree feeling that the most recent U.S. economic data would scare the Fed into delaying any further rate increases into 2018, if then.

Metals Focus has a dedicated team of analysts looking at all aspects of the Precious Metals sector – and also nowadays provides the statistical element of the World Gold Council’s regular quarterly analysis of global gold supply and demand. The group was initially put together as a break-away from the longstanding GFMS analytical group when the latter was acquired by Thomson Reuters in 2011 and a number of its analytical team previously worked for the latter and some of the methodology of its analysis mirrors that of GFMS, although the conclusions do sometimes differ slightly.

Looking at gold as the prime driver of the precious metals complex – although increasingly the other precious metals are to a major extent dependent on their demand as industrial metals particularly in the case of the platinum group (pgms) – the report does see potential for further positive price growth given the supporting underlying macroeconomic and geopolitical outlook.

In his presentation at the launch of this latest publication, Neil Meader, the group’s Research and Consultancy Manager, reflected on a slightly disappointing performance for the complex, despite great promise earlier in the year. The report thus suggests only a 2% average rise in the metal price this year compared with 2016. An earlier 5 year analysis of the precious metals complex by the consultancy had predicted $1,400 gold this year, and while this has not been totally ruled out, the latest analysis suggests that this price level may now not happen until next year unless some worrying geopolitical event (North Korea looks to be the most likely instigator) causes the metal price to spike again.

Writing here a week or so ago, we had suggested keeping a close eye on the largest gold ETF (GLD) to see the trend in institutional investment in gold in North America, which seems to be a great indicator of U.S. investment demand and thus of the overall trend in the global gold price level. After a strong couple of months, the past two days have seen 10.35 tonnes withdrawn from the ETF which is perhaps indicative of weak institutional demand for gold in the light of the recent price falls, although much of these can be put down to some recovery in the dollar index over the past few days.

In today’s trading gold is, so far, up a few dollars from yesterday’s low point although has not retained some of its earlier price gains seeing a degree of profit taking (or an engineered decline depending on who one believes) after it moved briefly back above $1,280. Silver is pretty flat while platinum and palladium are trading at broadly similar levels after the latter’s high flying move of last week. In later trading palladium again moved slightly ahead of platinum, although not significantly so. Thus so far this week platinum has moved up a little and palladium down a little more. Metals Focus favours platinum over palladium into next year. We may disagree given the latter’s better current fundamentals but all the North American precious metals markets are managed by the big money to a greater or lesser extent and, ultimately the markets each tend to move in the way the bullion banks and major institutions determine as the prime players in these market.

What the Metals Focus Investment Focus publication does do is set out its price forecasts in the light of what it sees as the supply/demand parameters for the current year and next. For gold it sees a surplus, albeit a slightly smaller one of 22 tonnes in 2018 and an average price for that year of $1,400 as against a $1,275 average for the current year, itself up from $1,251 in 2016.

Silver is seen as outperforming gold next year, as it usually does in a rising gold market and again sees a supply surplus of 72 tonnes this year and 66 tonnes in 2018. The consultancy analysts see silver, like gold, benefiting from a recovery in investor interest in safe haven assets. Here the analysts are looking for a $20.60 average price for the year which some may see as optimistic, but if you are a silver investor optimism usually rules.

The analysts also see some kind of recovery in platinum, despite a 450 million ounce projected surplus. leading to an average price of $1,090 in 2018 – due largely to platinum’s historic correlation with the gold price. However it sees palladium as underperforming its fellow pgm despite a 1.44 million ounce projected deficit and are predicting an average price of only $880 an ounce. That is around $30-40 below where it is at the moment, although the 2017 average price is seen as only $830 an ounce. We would probably disagree here with, in our view, palladium having the distinct possibility of maintaining a premium over platinum given the disparities in fundamentals supply/demand data.

Here’s what the World Gold Council reckons are the key takeaways from its newGold Demand Trendsreport. As can be seen it reckons demand has slowed y-o-y but that’s entirely because of lower gold ETF demand in the first half. When reviewing these figures, and extrapolating them for the full year, it should be borne in mind that H2 2016 gold ETF demand fell back sharply too in comparison with H1 2016.

WGC: Q2 and H1 gold demand down on slower ETF inflows

Q2 gold demand of 953.4t was 10% lower than 2016, while H1 demand slowed 14% to 2,003.8t. Y-o-y comparisons are affected by record ETF inflows in 2016: demand from this sector slowed dramatically after last year’s H1 surge. Central bank net purchases of 176.7t were also slightly lower in the first half (-3%). By contrast, bar and coin investment improved, as did jewellery demand, although the latter remains weak in a long-term context. Technology demand also made modest gains.

In case you haven’t already noticed, inflation has been steadily creeping up since July. In February, the most recent month of available data, consumer prices advanced at their fastest pace in five years, hitting 2.7 percent year-over-year. March data won’t be released until next week, but I expect prices to proceed on this upward trend, buttressed by rising mortgages and costs associated with health care and energy.

One of the consequences of strong inflation is that real rates—what you get when you subtract the current consumer price index (CPI) from the nominal rate—have turned negative. And when this happens, gold has typically been a beneficiary. This is the Fear Trade in action.

Take a look below. Gold shares an inverse relationship with the real 10-year Treasury yield, which is influenced by consumer prices. When inflation is soft and the yield goes up, gold contracts. But when inflation is strong, as it is now, it can push the Treasury yield into subzero territory, prompting many investors to move into other so-called safe haven assets, including gold.

Again, I expect consumer prices to continue rising, especially if President Donald Trump gets his way regarding immigration and trade. Slowing the stream of cheap labor from Mexico and other Latin American countries, coupled with raising new tariffs at the border, should have the effect of making consumer goods and services more expensive. Although it might sting your pocketbook, faster inflation could be constructive for gold investors.

$1,475 an Ounce Gold this Year?

In its weekly precious metals report, London-based consultancy firm Metals Focusemphasized the importance of negative real rates on the price of gold, writing that “real and even nominal rates across several other key currencies, including the euro, should also remain negative for some time.” The European Central Bank’s deposit rate currently stands at negative 0.4 percent, not including inflation, and Sweden’s Riksbank, the world’s oldest central bank, will continue its negative interest rate policy as it awaits stronger economic growth. Meanwhile, the Bank of Japan left its short-term interest rate unchanged at negative 0.1 percent at its meeting last month.

This is all beneficial for gold. Discouraged by the idea of negative rates eating into their wealth, many savers might be compelled to invest in gold, which enjoys a reputation as an excellent store of capital.

Based on the near-term outlook for real rates, as well as uncertainty over Brexit, rising populism in Europe and Trump’s trade and foreign policies, Metals Focus analysts see gold testing $1,475 an ounce this year. If so, that would put the yellow metal at a four-year high.

Central Banks Still Have an Appetite for Gold

Since 2010, global central banks have been net buyers of gold as they move to diversify their reserves away from the U.S. dollar. Although 2016 purchases fell about 35 percent compared to 2015, they still remained high on a historical basis, thanks mostly to China and Russia.

These purchases are likely to continue this year, according to Metals Focus, though at a slower rate as many banks get closer to meeting their target reserves amount.

Because gold accounts for only 2.3 percent of China’s reserves, as of March, the Asian country might very well keep up with its monthly purchases for some time. (The U.S., by comparison, has nearly 75 percent of its reserves in gold.)

I’ve pointed out before that it’s reasonable for investors to pay attention to what central banks are doing. They’re diversifying their assets and, in a way, hedging against their very own policies. It would be prudent for every household to do the same. As such, I recommend a 10 percent weighting in gold, with 5 percent in bullion (coins and jewelry), the other 5 percent in quality gold stocks.

We have seen three major reports out for London’s Platinum Week from Metals Focus, GFMS and the WPIC. They all offer comprehensive analyses in text, tabular form and graphical content of various aspects of the markets and they are a hugely valuable resource for followers of the pgms sector. There are definite differences of opinion on the relative supply and demand scenarios for platinum in particular in 2015, but all three analyses are predicting supply deficits ahead for the two major pgms, but on past performance such seemingly strong fundamentals may have little impact on prices.

The latest to report was Metals Focus with its inaugural Platinum & Palladium Focus 2016, a comprehensive 78 page long analysis of the platinum and palladium markets. In many respects it appears to this observer to offer the most realistic appraisal of the markets and likely price performance for the two major platinum group metals (pgms).

A couple of articles I’ve published on Sharpspixley.com on platinum group metals resulting from the release of these three very comprehensive reports on the sector are linked here:

This year’s first quarter is one for the history books. Not only did gold appreciate at its fastest pace in 30 years, but demand for the yellow metal was the strongest it’s ever been on record.

Let me repeat that: the strongest it has ever been.

Demand surged 21 percent from the same period a year ago, according to the latest World Gold Council (WGC) report. Most of this demand was driven by investment, with net inflows into gold ETFs reaching 363.7 tonnes, a seven-year high.

Bad News Is Good News for Investors Who Have Diversified with Gold

Uncertainty over the world economy, not to mention central bank policy, continues to act as a major catalyst for demand, heating up the Fear Trade. With many countries currently locked in a global race to see who can devalue their currencies the fastest, investors are seeking better, more reliable stores of value, and gold is happy to oblige.

This was the message shared by Wayne Allyn Root, the “Capitalist Evangelist,” whose presentation I had the pleasure to see at the MoneyShow last week in Las Vegas. The week before last I said I would be speaking at the event, which was founded in 1981 by my dear friend Kim Githler, and I had no idea how popular Root really was. A businessman, politician and author, Root was the vice presidential candidate for the Libertarian party in 2008 and this year endorsed Donald Trump for president. At the MoneyShow, he packed the room with 1,400 people. Whole crowds turned out to hear him sermonize on entrepreneurship, individual rights and the importance of owning tangible assets such as precious metals and rare coins as a hedge against inflation and today’s uncertain financial markets. Owning gold, he said, is no longer a luxury but a necessity.

One of Root’s most interesting data points is just how much purchasing power the dollar has lost since 1913, the year the Federal Reserve was created: A million dollars then is worth about $25,000 today. Gold, on the other hand, has not only held its value but appreciated. One million dollars in gold in 1913 would now be worth more than $60 million.

Other huge names that presented at the MoneyShow included Gary Shilling, Art Laffer and Craig Johnson, a Piper Jaffray CFA and President of the Market Technicians Association. I had an enjoyable dinner with Craig, who called the current rally a “FOMO” rally. (I only recently learned, from my niece, that FOMO stands for “fear of missing out” and is widely used on social media.)

Another illuminating presentation I’d like to mention was conducted by IBD’s Amy Smith, who convincingly spoke on how the 2016 elections might change the stock market. The most actionable takeaway was that most blue chip stocks have typically done well no matter who occupies the White House, confirming my own attitude that, at the end of the day, it’s the policies that matter, not the party. The most compelling example she used was Netflix, whose stock has been a steady climber throughout both Bush 43 and Obama’s presidencies.

A reasonable, well-positioned portfolio, then, consists of strong, entrepreneurial names; gold (I always recommend a 10 percent weighting: 5 percent in gold stocks, 5 percent in physical bullion); and short-term, tax-free municipal bonds, which have historically done well even in times of economic turmoil, such as the tech bubble and the financial crisis.

Follow the Smart Money

The smart money is indeed flowing into gold right now. Earlier this month I shared with you the fact that hedge fund manager Stanley Drukenmiller, notable for having one of the best money management track records in history, cited gold as being his family office fund’s number one allocation. Druckenmiller is joined by billionaire Paul Singer, whose hedge fund oversees $28 billion. In his letter to clients last month, Singer wrote: “It makes a great deal of sense to own gold… Investors have increasingly started processing the fact that the world’s central bankers are completely focused on debasing their currencies.”

About a third of global debt right now comes with a negative yield.

Elsewhere in the letter, Singer suggested that gold’s phenomenal first quarter, in which the metal rose 16.5 percent, is “just the beginning.” Further loss of confidence in central bankers’ ability to jumpstart growth could take the metal even higher.

This is the assessment of Paradigm Capital, who wrote in a recent report that “a standard gold price rally, a percentage exceeded or achieved in four of five major upcycles since 1976, would take us to around $1,800 ounces over the next three to four years.”

Register Today for Our Next Gold Webcast!

I invite all of you to register today for our next webcast, titled “All Eyes on Gold: What’s Attracting Investors to the Yellow Metal.” I’ll be discussing the chief factors driving gold demand right now, how historical and seasonal patterns affect gold and why the metal can be an integral part of your portfolio. The webcast will be held on June 8, starting at 4:15 PM Eastern time (3:15 PM Central time).

The best performing precious metal for the week was platinum, up 0.94 percent. This is the second week platinum has led the precious metals group, with gold coming in as the second-best performer, up 0.46 percent. In Zimbabwe which has significant platinum group metal mines, a deadline for all firms to transfer most of their shares to black Zimbabweans has passed with the close of the quarter, but it is not clear how many companies have complied.

Gold is had its best quarterly rally in 30 years, reports Bloomberg, as demand for haven assets continue to surge. The precious metal got a boost following Janet Yellen’s remarks this week stating that the Federal Reserve will proceed “cautiously” with rate hikes this year. Gold investors have also poured money into gold ETFs at the fastest pace since 2009, with negative rates in Europe boosting its appeal as seen in the chart below.

In February, China’s imports of gold from Hong Kong increased from the smallest level since 2011, reports Bloomberg. The Perth Mint also reported strong data this week, with minted bar sales coming in at 47,948 ounces for March compared with 37,063 ounces in February.

Weaknesses

The worst performing precious metal for the week was palladium, down -1.32 percent. In February palladium prices dipped 1.1 percent to around $495 an ounce.

Data from the Commodity Futures Trading Commission this week shows investors increased net long positions on the COMEX for the third consecutive week, pushing it to the highest since February 2015. Precious Metals Weekly writes that this positioning could limit the upside momentum in the near-term, however the net positioning has considerable room to increase and reach 2010/2011 peaks.

Gold wiped out March’s gains on the back of a strengthening U.S. labor market. ADP Research Institute reported 200,000 workers brought on in March, while the Labor Department reported Friday that payrolls grew by 215,000 workers. Demand for the precious metal could also fall in the March quarter, according to Reuters Mumbai. Higher prices along with a jeweler strike in India that has been continuing in several parts of the country for its thirtieth day, curbed sales in the world’s second-biggest consumer.

Opportunities

Research firm Metals Focus says that the bear market in gold is over, and sees the metal rallying to $1,350 an ounce. The group believes a changing investor sentiment in the first quarter will solidify the melt away in months ahead. “Confidence in central banks has been shaken and there are mounting concerns towards the increasing number of negative policy rates around the world,” the company stated Thursday.

The world’s largest asset manager, BlackRock, and PIMCO are both recommending inflation-linked bonds and gold, according to ZeroHedge, warning that costs are poised to pick up and there is a growing risk of inflation. BlackRock believes stabilizing oil prices and a tighter labor market could be contributors. BCA Research also pointed out this week the gap between consumers’ realized and expected inflation. A divergence here could mean a wave of investors will flock to gold when and if their expectations are not in line with the realized data which show core inflation rising over the last two month.

Calibre Mining Corp. and Centerra Gold released results this week from their La Luz Gold Project in Nicaragua – drill results show 53.7 meters grading 10.47 grams per ton. In the announcement, President and CEO Greg Smith stated, “This new high-grade intercept at Cerro Aeropuerto together with the previously released intercept of 71.05 meters grading 2.89 g/t highlights the potential for additional discoveries within the historic portion of the La Luz Project.” Nicaragua is significantly underexplored but Calibre has been one of the early movers in that country.

Threats

Jeffrey Christian, managing partner at CPM, stated in an interview that he believes bullion will drop more than 7 percent to $1,130 an ounce by September, according to Bloomberg. His outlook, which is in-line with Goldman Sachs, looks at a strengthening U.S. economy (which could cause investors to re-evaluate their economic pessimism and their need for gold).

Gold Fields Mineral Services, a research unit of Thomson Reuters, stated in an email report this week that it thinks the gold rally will prove to be short lived and sees the metal dropping to under $1,200 an ounce. The statement went on to say, “Once current market turbulence starts to ease we are likely to see the price retreat again.”

Commodity prices could fall as investors rush for the exits, warns Barclays Plc. Bloomberg reports that the group sees commodities, including oil and copper, at a risk of steep declines as recent advances aren’t fully grounded in improving fundamentals.

Seldom has so much information on gold been released in a single day. The last day of Q1 2016 has seen the publication of consultancy Metals Focus’ Gold Focus 2016 and the similar GFMS Gold Survey 2016. Both run to nearly 100 pages and are packed with analysis and data.

The third report is out from the World Gold Council (for which nowadays Metals Focus is the major gold statistics provider). This looks at gold in a negative interest rates environment.

All three of these reports are downloadable off the internet free of charge and are absolute musts for anyone with an interest in gold analysis and trends. To download click on the respective links below:

Today will be a busy day for gold analysts. The two biggest London-based precious metals consultancies, Metals Focus and GFMS are both releasing their latest treatises on the global gold market and analysts will be poring over the plethora of data in the reports.

First off the blocks is Metals Focus with its 99-page Gold Focus 2016 report. At the time of writing the GFMS publication (in the event a marginally less heavy publication at 96 pages) was not set to be released for another hour. The two reports will be somewhat similar in content if not necessarily in their conclusions as both consultancies have similar roots with Metals Focus originally formed primarily by a breakaway group of former GFMS analysts.

The two consultancies’ views on where the gold price is likely to go in the medium term will thus be of particular interest. The teams of analysts who work on these reports are basically impartial without any specific axe to grind and while their predictions will largely be based on fundamentals – and it’s often arguable whether the gold price necessarily follows such in the short and medium term where easily swayable sentiment and extraneous geopolitical and geo-economic factors may impact. But even so their research and views are seen as significant in terms of the underlying situation.

In the event Metals Focus is definitely more bullish on the likely progress of the gold price than it has been for some time. In an accompanying press release, Metals Focus Director, Nikos Kavalis comments “changing expectations towards the outlook for US interest rates, concerns about monetary policy elsewhere, as well as turbulent equity and bond markets, have re-kindled institutional investor interest in the metal.” This has shown itself initially in the very positive performance of gold in the first quarter of the current year – the best early year performance since 2008, the consultancy notes. (That on its own may generate some warning bells – economic history does tend to repeat itself!) This in turn helped gold to rally by over 21% from end-2015 to a $1,285 peak in early March.

Kavalis then added the comment “this impressive recovery will mark the end of the bear cycle that started in late 2011. Further gains later in the year are forecast to see gold peak at $1,350 by end-2016, almost 30% higher than its December 2015 low.” This is a remarkably positive statement from a consultancy which is always extremely conservative in its overall projections. While not positive enough for the gold bulls out there – who are perhaps looking for even higher year-end levels – it does represent a very positive view from one of the sector’s mainstream consultancies.

Thus this expectation reflects Metals Focus’ belief that the change in investor sentiment seen in the first quarter is more likely to solidify than melt away in the months ahead. Its analysts expect the pace of US rate increases will be slow, in line with the current market consensus. Related to this, the Consultancy believes that the upside for the US dollar is limited. In addition, confidence in central banks has been shaken and there are mounting concerns towards the increasing number of negative policy rates around the world. All these factors are seen as being positive for gold in the current year.

Finally, Metals Focus notes, the landscape across other investment classes is also positive for gold, given the turmoil in equity and bond markets and signs that the wider commodity bear market may well have passed.

The consultancy therefore expect that investor inflows into gold will continue in the months ahead, as an increasing number of managers are convinced by the metal’s medium-term prospects and as interest also grows in the wealth management and private banking sectors from which gold had almost been seen as of no interest over the past three years of seemingly ever-rising general equities. Given the overall long overhang in gold remains low, compared to the levels seen during the bull market, the analysts believe that there is scope for fund inflows to remain significant.

Coming back to gold’s fundamentals it is also reckoned that these are trending positive for the metal too. After years of consistent increases, mine production is seen as beginning to decline this year, although perhaps only marginally so. Scrap supply is also forecast lower.

Jewellery and physical investment demand are seen as remaining virtually unchanged, in spite of higher gold prices. Finally, the consultancy notes, while the overall volumes may decline somewhat, central banks will remain net buyers for yet another year, although the vast bulk of this demand is coming from only two nations – Russia and China. Will others follow suit?

Metals Focus does warn however that any upwards path for the gold price will not necessarily be a smooth one. It points out that over the past few days in late March, the gold price suffered a 6% correction from its earlier peak. Further losses cannot be ruled out, particularly given public data and field research both suggesting some of the recent buying had been tactical rather than strategic in nature.

Likely triggers for moves both up and down will continue to come in the form of changes in the consensus expectations for US monetary policy, moves in the strength or otherwise in the US dollar, equity and bond markets. Nonetheless, Metals Focus believes that such corrections will be both limited and short-lived, with the December lows unlikely to be revisited.

So $1,350 gold by the year-end. As noted above the true gold bulls will be looking for a higher figure and may be disappointed by the Metals Focus conclusions. But for the long suffering gold investor, and for the gold miners which are generally in a far better position than many doom and gloom merchants have been suggesting, a year-end gold price at this kind of level will be very welcome.

As readers of lawrieongold.com will already know, I also write for other websites and usually the terms of so doing are that I can’t publish those full articles here as well – but I can publish synopses and links so you can read the full articles on the other sites.

So here are a couple of articles I’ve published over the past couple of days on Sharpspixley.com

The first is an article on palladium the metal virtually all the mainstream analysts reckoned would be the best performing precious metal last year – but it turned out to be the worst performer in the precious metals complex – so don’t believe what the mainstream analysts tell you. They are wrong probably as often as they are right!

Indeed palladium is a terrific example of markets trumping analysts and that in these days of High Frequency Trading and enormous speculation on the futures markets, it is other factors than fundamentals that really move the prices in a relatively small market like that for palladium. Last year virtually every precious metals analyst out there was predicting that palladium would be by far the strongest performing precious metal as its fundamentals looked so positive. In the event it was about the worst performer of all. You can’t rely on the analysts to make you money in these hugely manipulated markets where futures, coupled with high frequency trading, and a major degree of investor sentiment, really call the tune…..

The second looks at the Gold:Silver ratio and the silver price, and how it is very much tied to gold’s performance, but with more volatility.

Excerpt:

The gold:silver ratio (GSR), much followed mainly by silver investors convinced that one day it will come down to its reputed historical level of 16:1, remains languishing in the high 70s. Personally I doubt whether we will ever see the 16:1 level again – certainly not in my lifetime (but I am getting old!) Apart from the very brief silver price spike when the Hunt Brothers tried to corner the silver market (and almost succeeded before being brought down and bankrupted) the GSR has moved since then in the range of 31.5 (a very shortlived spike downwards coinciding with the brief silver price peak in April 2011) and close to 100. As I write it is standing at 77.6.

Silver, sometimes known in the trade as ‘the devil’s metal’ is renowned for its price volatility. The fact is, that in most views, it can no longer be really considered a monetary metal per se. There is, though, still a substantial trade in officially issued silver coins which does, I suppose, give it some kind of monetary credibility although the sale value thereof tends to be substantially higher than any face value that may be put on them. They are minted very much for the investment market. But overall principal global demand for silver is industrial so the price movement relationship with gold is not necessarily a logical one – but it is ongoing nonetheless….

With the Australian dollar gold price currently sitting at over AUD $1,600, gold miners in the world’s second largest producing nation after China are seeing price strength, whereas their U.S. counterparts are seeing the opposite. I have been pointing this out for some time – here and on other websites I write for – so its nice to see such a heavy hitter as the Metals Focus specialist precious metals consultancy coming up with commentary on the same theme. The following is abstracted from their latest Precious Metals Weekly newsletter:

It’s not all doom and gloom for Australian Gold Miners

Gold priced in US dollar terms is languishing some 40% below the 2011 peaks, however, when priced in Australian dollars (AUD) it is just 11% down and since November has risen by some 24%. The Australian economy is heavily exposed to the commodities sector and has been one of the hardest hit by the general decline in prices. The AUD, which at its peak would buy 1.10 US dollars (USD) has now declined by 36% and can now purchase 0.70 USD.

One of the features of the recent commodity bull market was a high cost inflation environment. Particular pressure was felt from labour costs, as shortages of skilled personnel and competition from bulk commodities drove wages up. Labour often makes up as much as 50% of a mine site’s costs. The slowdown across the commodities sector over the last few years has now led to less competition and an end to above inflation wage demands. Other input costs such as oil, which on average makes up circa 10% of mine site cost, have also dropped significantly (circa 40%) over the last year.

Looking at the second quarter 2015 and focusing on Australian producers, total cash costs have averaged A$805/oz and all-in sustaining costs (AISC) averaged A$1,124/oz, a decline of 9% and 4% from their Q2 2013 peaks. But in US$ terms, when the benefits of the fall in the Australian dollar are added in, costs have fallen by 28% and 26% respectively. This has helped mining companies increase their basic margin between AISC and the gold price to A$401/oz, from the low of A$243/oz which was hit in Q2 2013.

London based specialist precious metals consultancy, Metals Focus, presents its views on the likelihood of mine closures in its latest weekly Precious Metals Focus letter. A lightly edited version of its letter, plus some additional comment, follows:

With the gold price sitting under $1,100/oz for the first time since early 2010, a significant portion of global production is now operating at a loss. At first glance with costs during Q1 15 averaging $687/oz on a total cash cost basis (TCC) and $878/oz on an all-in sustaining (AISC) basis, it would appear that the industry should be in good shape. However, the cost curve published in the consultancy’s latest gold report tells a different story.

Looking at the global cost curve, which represents some 1,650t of annual production. On a TCC basis, at $1,100/oz just 4% of the cost curve finds itself under water, although if gold was to fall to $1,000/oz, this would increase to 10%. However, on an AISC basis the proportion of loss making mines at $1,100/oz swells to 24%, or circa 400t of annual gold production. Obviously a higher proportion would fall into the category at lower gold prices.

But before we draw to the conclusion that production is therefore about to fall dramatically, there are a whole multitude of factors that need to be considered reckons Metals Focus.

Firstly, closing a mine in itself is often a very costly undertaking. The workforce for instance, may be entitled to some redundancy or retraining payments. Meanwhile, decommissioning of the process plant and mining equipment, as well as reclamation of the land and watercourses and any necessary environmental remediation has to be accounted for. Because of this, rather than closing an operation, mining companies will often be prepared to operate at a loss in the short term in the hope that commodity prices recover.

When looking at the potential of mine closures, it is also worth considering the geographic distribution of these loss making operations. On an AISC basis, 20% of current unprofitable production is based in South Africa, where as has been witnessed in the platinum industry cutting production is a particularly difficult process, thanks to the high levels of union representation and the country’s already high unemployment rate. Currently there is the potential for disruption as Unions and the mining companies remain well apart in the latest round of wage negotiations. In contrast, Australia, which hosts 18% of the loss making production, is a more likely candidate to see some production cuts. This said, closing a mine is often the last choice, instead companies are looking at other ways to lower costs.

One of the main constituents of the AISC is corporate costs (G&A). This metric has already been a major target of cost reduction. In our Gold Peer Group Analysis Report, average G&A costs have fallen from a peak of US$53/oz in Q1 13 to US$36/oz in Q1 15. However, for some smaller producing companies G&A costs are still over $100/oz. One way in which G&A costs can be lowered is through company consolidation, allowing duplicated services at the head office level to be cut. This in our view is helping to prompt some of the recent increase in M&A activity. Oceana Gold’s proposed takeover of Romarco Minerals is a good example, during 2014. Oceana’s G&A costs per ounce of gold production was $112, but by 2017 Oceana is aiming to produce 540koz, which would lower G&A costs to $64/oz, assuming head office costs remain fixed.

Furthermore, as was the case in 2014, depreciating producer currencies continue to be key in helping miners cut US dollar denominated costs. Both the Rand, Canadian and Australian dollars, are currently close to or more than 20% weaker than the 2014 mean rates. In particular, weakening domestic currencies tend to have the greatest impact on higher cost operations, which are often more labour intensive, and as such gain most from the effect decline in salary costs on a US dollar basis. That said, for some of those at the top end of the cost curve the future looks bleak, and closure now seem inevitable. Over the 12 months Metals Focus estimates that there will be around 75t of cost related closures globally.

At lawrieongold we are not sure whether even this level of closures will be any help in salvaging gold prices from their current low level, or in helping prevent further falls. To put it into context this is only around the level of the amount of physical gold that passed through the Shanghai Gold Exchange in the last reported week’s trading. (See: Enormous physical gold demand on at least three continents), so will it have any significant effect. We somehow doubt it. But the longer prices stay down, or fall further, the closure numbers, either through company initiated shutdowns because of costs, or natural wastage through declining reserves, coupled with the accompanying fall in building of new projects may begin to have an effect, but this could yet be another year or more away even if prices were to remain at current levels or lower.

The World Gold Council has released its latest quarterly Gold Demand Trends publication today, this time with data provided by Metals Focus – GFMS has been the principal information provider in the past for these reports. Here follows the WGC’s Press Release ahead of any attempt to delve into the report in more detail. Mineweb has now also published a more detailed article from me on some of the report’s findings – see WGC resurrects China as world’s No.1 gold consumer. There is also an article on Seeking Alpha:Which Nation Is Really World’s No.1 Gold Consumer?

The first three months of 2015 saw stable gold demand, according to the latest Gold Demands Trends report from the World Gold Council. Total demand for Q1 2015 was 1,079 tonnes (t), down just 1% on the same period last year.

Conditions differed from market to market, but at an aggregate level, these differences broadly balanced each other out. Once again, consumers in Eastern countries dominated the market with China and India alone accounting for 54% of total global consumer demand in the quarter.

Global demand for jewellery, still the most significant component of overall demand, totalled 601t in Q1 2015, 3% lower than the 620t recorded in the same quarter last year. There were pockets of strength across a number of South East Asian countries – including Malaysia, Indonesia, South Korea, Thailand and Vietnam. In addition, jewellery demand in India was up 22% to 151t whilst the US saw further steady growth, up 4%. This was counterbalanced by declines in Turkey, Russia and the Middle East and in China, jewellery demand dropped 10% to 213t, as a rising stock market diverted money into equities, but it was still up 27% against the five-year average.

Investment demand, the other key driver of the world’s gold market, rose 4% to 279t in Q1 2015, up from 268t in Q1 2014. There were net inflows of 26t into gold-backed Exchange Traded Funds (ETFs) – turning positive for the first time since Q4 2012 as western investor sentiment returned to gold. Investment in bars and coins came under pressure in the face of buoyant stock markets, notably in India and China, and currency fluctuations in Turkey and Japan, but this was offset by strong retail investor demand in the euro zone up 16% to 61t, most notably in Germany and Switzerland.

Central banks continued to be strong buyers, purchasing 119t in the quarter, the same volume as in Q1 2014. This was the 17th consecutive quarter that central banks have been net purchasers of gold as they continue to seek diversification away from the US dollar.

Total supply remained virtually unchanged at 1,089t as a 2% rise in Q1 2015 mine production to 729t was balanced by a 3% fall in recycling to 355t, compared with the same quarter last year.

Alistair Hewitt, Head of Market Intelligence at the World Gold Council, said:

“The global gold market’s ecosystem functioned healthily during the first three months of 2015 illustrating the unique nature of gold and its ability to rebalance across sectors and geographies. This broadly stable global picture belies regional and sector differences which include: a 10% drop in jewellery demand in China, a 22% uptick in jewellery demand in India and the first net inflows to gold ETFs since 2012, reflecting gold’s resilience and ability to respond to different cues in different ways. Once again, consumers in Eastern countries dominated the market with China and India alone accounting for 54% of total global consumer demand in the quarter”

In value terms, gold demand in Q1 2015 was US$42bn, down 7% compared to Q1 2014. The average gold price of US$1,218.5/oz was down 6% on the average Q1 2014 price.

The key findings from the report are as follows:

Total global jewellery demand was 601t in the first quarter, a fall of 3% on the same quarter last year. These overall figures mask significantly different local trends: In India, jewellery demand was 151t, 22% higher than the same period last year albeit from a very low base. Demand was also 4% higher in both the US and the UK, at 22.4t and 4t respectively. In China, demand fell 10% to 213t against the same quarter in 2014, as slower economic growth and a buoyant stock market affected consumer purchases, but it exceeded its five-year quarterly average by 27%, lending weight to the view that the longer-term uptrend is comfortably intact

Total investment demand was up 4% to 279t, compared to 268t in the same quarter the previous year. Demand for bars and coins fell 10% from the previous year to 253t as retail investors, notably in India, diverted their money into equities in the wake of the country’s strong stock market performance. However ETFs saw their first inflows since Q4 2012, albeit at the modest rate of 26t.

Central bank net purchases were 119t in Q1 2015, unchanged on the same period in 2014 and the 17th consecutive quarter in which central banks have been net purchasers as they diversify their assets.

Total supply remained virtually unchanged at 1,089t as a 2% rise in Q1 2015 mine production to 729t was balanced by a 3% fall in recycling to 355t, compared with the same quarter last year

Gold demand and supply statistics for Q1 2015

Q1 gold demand of 1,079t was 1% lower than the 1,090t seen in Q1 2014

Total consumer demand – made up of jewellery demand and coin and bar demand – totalled 854t, a fall of 5% on the 902t seen in the same period last year

Consumer demand in India rose 15% to 192t, while in China it declined 7% to 273t. Taken together, consumers in India and China alone now account for 54% of all consumer demand

Demand in the technology sector was 80t for the quarter, down 2% compared to the previous year

Gold demand in value terms in Q1 2014 was US$42bn, down 7% on last year

It now looks as though Q1 gold withdrawals from the Shanghai Gold Exchange (SGE) will have reached around 623 tonnes – a 10.5% increase on last year’s record figure of 564 tonnes. The actual figure for the week ending March 27th (no Easter holiday in China) was just under 46 tonnes and that for week ending April 3rd 40 tonnes making the Q1 figure around 623 tonnes (assuming even daily figures across the week).

While mainstream analysts seem to discount SGE withdrawals as being a true representation of actual Chinese demand – although China gold watcher Koos Jansen is adamant from his questioning of Chinese officials that SGE withdrawals and Chinese gold demand are in effect the same. The argument continues. But be that as it may SGE withdrawals, whether the same as total Chinese demand or not, are very certainly a strong indicator of year on year Chinese gold flows, so it is very apparent from the latest figures that Q1 demand is very likely to be substantially higher than a year earlier.

It should be recalled though that last year, although Q1 SGE withdrawals reached the previous record level for the period, full year figures fell short of those for 2013 as demand tends to dip through the middle months of the year and in 2014 the mid-year dip was far greater than a year earlier, although the tail end of the year was particularly strong. It had been thought perhaps that the higher gold prices of the week of March 27th might have put a bit of a dent in Chinese demand, which can be affected by gold price levels, but it obviously still remained strong.

Gold today has pulled back from the latest rise which appears to have resulted from poor U.S. non-farm payroll figures which were well below expectations. These are seen as an indicator of when the U.S. Fed will start to raise interest rates with most observers now seeing June as unlikely – although there’s always the chance that the Fed will make the move then, but at the minimum level of 25 basis points, to test the waters. However some see the latest payroll figures as suggesting a rate rise will now not occur until late in the year, if then. And again, as suggested by metals consultancy Metals Focus in its Gold Focus 2015 report (see: End of bear cycle for gold in 2015 – Metals Focus, even if and when the Fed does make the move, although there may be a knee-jerk downwards reaction in the gold price, this will be shortlived.

Most mornings, when I log on to my computer, two of the first sites I check are www.sharpspixley.com and www.kitco.com to check out how the gold price is moving and what it has done overnight, as well as hyperlinks to the latest significant items of gold news from other sources . The former carries an excellent real-time update on the gold price, not only in US dollars, but also in a number of other relevant major currencies, while on the latter I tend to be drawn to the small thumbnail chart which shows the most recent move in the gold price in a rather exaggerated graphical format.

From this little kitco chart one does at least get an impression of the way the gold price has been trending overnight and in the opening of trade in Europe and recently an interesting trend has become apparent. Almost every day recently, almost without exception, the Asian markets have taken the gold price higher to see it taken down sharply again on European and London opening – and then the day’s trading tends to see it recovering unless there has been some significant geopolitical or financial news which has taken it to another level either up or down. But the pattern of the overnight price being held or rising followed by the sharp take down on the London market as soon as trading opens, has been very apparent of late. It was apparent again today, but was followed by a decent price recovery taking gold back to above $1190 ahead of New York opening.

While I’m not sure how significant this all is, I do see the overnight Asian strength – even if at the moment it’s only mildly positive, as encouraging for the long term gold price, while the London morning movement does smack of the same slightly bearish forces at work ahead of the new LBMA gold price benchmarking process. But one should also point out that although the initial London movement has tended to be down – by perhaps a few dollars – there has also tended to be a small pick up as the day progresses and this seems to continue in New York unless something like the next statement (however inconclusive) from Janet Yellen or one or other of the various FOMC participants on a somewhat nebulous interest rate raising timetable moves the price a little more sharply up or, usually, down.

It was thus interesting to listen to Nikos Kavalis of Metals Focus’ views on the longer term likely effect of Fed interest rate raising when it actually occurs at the launch of the consultancy’s Gold Focus publication yesterday. As any such process of raising interest rates is likely to remain exceedingly cautious, it will still leave then in real negative territory which is positive for gold. With the likely consequent unwinding of short positions built up in anticipation of the Fed’s rate rise thereafter, the precious metals consultancy sees this pointing to the end of the current bear cycle, and while it sees the potential for further gold price dips in Q2 and Q3, it sees a rising price from Q4 heading forward. See: End of bear cycle for gold in 2015 – Metals Focus

Gold is teetering on making a significant breakthrough through the $1300 level but there could also be some adverse factors which could bring it back down again. Another post submitted to Mineweb.com for publication on that site.

Lawrie Williams

While gold breached the $1300 level in overnight trading last night this is obviously way too early to call this the start of a consistent gold price uptrend, although it is obviously a very encouraging start to the year for gold bulls recently enhanced by the Swiss national Bank’s decision to drop the Swiss franc’s peg to the Euro. The question now facing us is whether or not a sustained breakthrough can be achieved. At the time of writing the price had fallen back into the high $1290s but was again testing the $1300 level.

The European Central Bank (ECB) is widely anticipated to announce that it is to implement a Quantitative Easing programme and buy government bonds to try and help stabilise the Eurozone economy at its meeting tomorrow. But apart from some kind of knee-jerk reaction when the decision to do so, or kick the can further down the road, is announced we don’t see this having any serious price impact given many of these factors have already been taken into account in the recent gold price advance anyway. Either way the Eurozone continues to have significant problems.

Greek elections come up on January 25th. Opinion poll figures suggest the outcome is probably still too close to call, but there is a real chance that the anti-austerity, and anti-EU Syriza party may well win – but whether it might win by a sufficient majority to hold power on its own is much more uncertain. The latest opinion polls put Syriza as gaining more ground and now ahead by between 4 and 6.5%, but whether this lead is sufficient to give it an outright majority should it win – even with the extra 50 seats in parliament given to the winning party to help it form a government under the Greek system – is far less certain. Pundits put it a few seats short of an outright majority should this be the case. While Greek public opinion appears to support many of Syriza’s proposals, particularly those in cutting back the current austerity programmes and reneging on the country’s debt, it also appears to favour remaining in the Eurozone and worries about that may prompt a last minute swing to the longer-established political groups and yet deliver victory to the incumbent New Democracy party and its allies.

What is particularly significant about the Greek elections, though, is that if Syriza does win it could send shockwaves through the whole of the Eurozone. Many countries have seen the rise of ‘alternative’ political parties – not least in the UK (UKIP) and France (Front National). Britain’s highly regarded Economist Intelligence Unit points to the rise of these alternative ‘populist’ parties as having the potential to create substantial changes to voting patterns – it also cites Denmark, Finland, Spain, Sweden, Germany and Ireland as having spawned political parties which could lead to unpredictable results in their next electoral polls. A Syriza victory would likely give a significant boost to these other populist options and potentially lead to major political instability throughout Europe and the break-up of the single currency, if not the EU itself.

Political instability is, of course, manna for the gold bulls as people rush to buy the precious metal as providing some form of stability as it virtually always has in the past.

Taken with continuing strife in the Ukraine, with major potential still for destabilising escalation which could spread to other former Soviet countries, and the huge political and military impact of fundamentalist Islamic groups in the Middle East with potential to spread to North Africa, and now also in West Africa with Boko Haram, the world is beginning to look increasingly fragmented – all positive for gold.

But there is near-term downside risk for gold too, as pointed out in the latest Precious Metals Weekly newsletter from specialist analysts, Metals Focus. The group believes that the recent positive factors are all temporary and expect that the upturn in gold will eventually lose its momentum.

Looking beyond the positive euphoria of the past few weeks, Metals Focus sees three major headwinds develop for gold, likely in the second half of the quarter. First, it is likely that US interest rate expectations will return with a potentially adverse impact on gold in North America in particular. Second, Eurozone concerns should probably wane. Third, the current strength of physical demand, fuelled by pre-Chinese New Year buying, will eventually subside. Should these three factors indeed concur, the consultancy believes that investor sentiment towards gold will quickly evaporate. They stress that their field research so far suggests little conviction by institutional players that there is a genuine change in trend for the price and that recent positioning favouring gold seems to be mostly opportunistic rather than strategic.

So, as usual, the path of the gold price is perhaps impossible to call with so much depending on often unpredictable geopolitical events to give it the occasional upwards or downwards spurt. The fact that the first three weeks of the current year have seen a plethora of events and market activities which have largely benefited gold so far does suggest that we are going to see a turbulent year ahead which will likely provide, at various stages, both upwards and downwards pressures on precious metals prices. Where this will leave them in 12-months time is anybody’s guess although we would err on the positive in our own predictions.